Frankfurt am Main, November 19, 2012 -- Moody's Investors Service
has today downgraded France's government bond rating by one notch
to Aa1 from Aaa. The outlook remains negative.

Today's rating action follows Moody's decision on 23 July 2012 to
change to negative the outlooks on the Aaa ratings of Germany,
Luxembourg and the Netherlands. At the time, Moody's also
announced that it would assess France's Aaa sovereign rating and
its outlook, which had been changed to negative on 13 February
2012, to determine the impact of the elevated risk of a Greek
exit from the euro area, the growing likelihood of collective
support for other euro area sovereigns and stalled economic
growth. Today's rating action concludes this assessment.

1.) France's long-term economic growth outlook is negatively
affected by multiple structural challenges, including its
gradual, sustained loss of competitiveness and the long-standing
rigidities of its labour, goods and service markets.

2.) France's fiscal outlook is uncertain as a result of its
deteriorating economic prospects, both in the short term due to
subdued domestic and external demand, and in the longer term due
to the structural rigidities noted above.

3.) The predictability of France's resilience to future euro area
shocks is diminishing in view of the rising risks to economic
growth, fiscal performance and cost of funding. France's exposure
to peripheral Europe through its trade linkages and its banking
system is disproportionately large, and its contingent
obligations to support other euro area members have been
increasing. Moreover, unlike other non-euro area sovereigns that
carry similarly high ratings, France does not have access to a
national central bank for the financing of its debt in the event
of a market disruption.

At the same time, Moody's explains that France remains extremely
highly rated, at Aa1, because of the country's significant credit
strengths, which include (i) a large and diversified economy
which underpins France's economic resiliency, and (ii) a strong
commitment to structural reforms and fiscal consolidation, as
reflected in recent governmental announcements, which may, over
the medium term, mitigate some of the structural rigidities and
improve France's debt dynamics.

In a related rating action, Moody's has also downgraded the
ratings of Société de Financement de l'Economie Française (SFEF)
and Société de Prise de Participation de l'État (SPPE) to Aa1
from Aaa. Furthermore, Moody's has affirmed the Prime-1 rating of
SPPE's euro-denominated commercial paper programme. The outlooks
on the ratings of the two entities remain negative. The senior
debt instruments issued by the two entities are backed by
unconditional and irrevocable guarantees from the French
government.

RATINGS RATIONALE

The first driver underlying Moody's one-notch downgrade of
France's sovereign rating is the risk to economic growth, and
therefore to the government's finances, posed by the country's
persistent structural economic challenges. These include the
rigidities in labour and services markets, and low levels of
innovation, which continue to drive France's gradual but
sustained loss of competitiveness and the gradual erosion of its
export-oriented industrial base.

The rise in France's real effective exchange rate in recent years
contributes to this erosion of competitiveness, in particular
relative to Germany, the UK and the US. The challenge of
restoring price-competitiveness through wage moderation and cost
containment is made more difficult by France's membership of the
monetary union, which removes the adjustment mechanism that the
ability to devalue its own currency would provide.

Apart from elevated taxes and social contributions, the French
labour market is characterised by a high degree of segmentation
as a result of significant employment protection legislation for
permanent contracts. While notice periods and severance payments
are not significantly higher than they are in other European
countries, some parts of this legislation make dismissals
particularly difficult. This judicial uncertainty raises the
implicit cost of labour and creates disincentives to hire. In
addition, the definition of economic dismissal in France rules
out its use to improve a firm's competitiveness and
profitability.

Moreover, the regulation of the services market remains more
restrictive in France than it is in many other countries, as
reflected in the OECD Indicators of Product Market Regulation.
The subdued competition in the services sector also has a
negative effect on the purchasing power of households and the
input costs of enterprises. France additionally faces significant
non-price competitiveness issues that stem from low R&D
intensity compared to other EU countries.

Moody's recognises that the government recently announced
measures intended to address some of these structural challenges.
However, those measures alone are unlikely to be sufficiently
far-reaching to restore competitiveness, and Moody's notes that
the track record of successive French governments in effecting
such measures over the past two decades has been poor.

The second driver of today's rating action is the elevated
uncertainty with respect to France's fiscal outlook. Moody's
acknowledges that the government's budget forecasts target a
reduction in the headline deficit to 0.3% of GDP by 2017 and a
balancing of the structural deficit by 2016. However, the rating
agency considers the GDP growth assumptions of 0.8% in 2013 and
2.0% from 2014 onwards to be overly optimistic. On top of rising
unemployment, France's consumption levels are being weighed down
by tax increases, subdued disposable income growth and a
correction in the housing market. Net exports are unlikely to
drive economic activity in light of reduced external demand, in
particular from euro area trading partners such as Italy and
Spain.

As a result, Moody's sees a continued risk of fiscal slippage and
of additional consolidation measures. Again, based on the track
record of successive governments in implementing fiscal
consolidation measures, Moody's will remain cautious when
assessing whether the consolidation effort is sufficiently deep
and sustained.

The third rating driver of Moody's downgrade of France's
sovereign rating is the diminishing predictability of the
country's resilience to future euro area shocks in view of the
rising risks to economic growth, fiscal performance and cost of
funding. In this context, France is disproportionately exposed to
peripheral European countries such as Italy through its trade
linkages and its banking system

Moody's notes that French banks have sizable exposures to some
weaker euro area countries. As a result, despite their good
loss-absorption capacity, French banks remain vulnerable to a
further deepening of the crisis due to these exposures and their
significant -- albeit reduced -- reliance on wholesale market
funding. This vulnerability adds to the government's contingent
liabilities arising from the French banking system.

Moreover, France's credit exposure to the euro area debt crisis
has been growing due to the increased amount of euro area
resources that may be made available to support troubled
sovereigns and banks through the European Financial Stability
Facility (EFSF), the European Stability Mechanism (ESM) and the
facilities put in place by the European Central Bank (ECB). At the same
time, in case of need, France -- like other large and highly
rated euro area member states -- may not benefit from these
support mechanisms to the same extent, given that these resources
might have already been exhausted by then.

In light of the liquidity risks and banking sector risks in
non-core countries, Moody's perceives an elevated risk that at
least part of the contingent liabilities that relate to the
support of non-core euro area countries may actually crystallise
for France. The risk that greater collective support will be
required for weaker euro area sovereigns has been rising, most
for notably Spain, whose economy and government bond market are
around twice the combined size of those of Greece, Portugal and
Ireland. Highly rated member states like France are likely to
bear a disproportionately large share of this burden given their
greater ability to absorb the associated costs.

More generally, further shocks to sovereign and bank credit
markets would further undermine financial and economic stability
in France as well as in other euro area countries. The impact of
such shocks would be expected to be felt disproportionately by
more highly indebted governments such as France, and further
accentuate the fiscal and structural economic pressures noted
above. While the French government's debt service costs have been
largely contained to date, Moody's would not expect this to
remain the case in the event of a further shock. A rise in debt
service costs would further increase the pressure on the finances
of the French government, which, unlike other non-euro area
sovereigns that carry similarly high ratings, does not have
access to a national central bank that could assist with the
financing of its debt in the event of a market disruption

Today's rating action on France's government bond rating was
limited to one notch given (i) the country's large and
diversified economy, which underpins France's economic
resiliency, and (ii) the government's commitment to structural
reforms and fiscal consolidation. The limited magnitude of
today's rating action also reflects an acknowledgment by Moody's
of the French government's ongoing work on a reform programme to
improve the country's competitiveness and long-term growth
perspectives, with key measures expected to be outlined in the
National Pact for Growth, Competitiveness and Employment.
Moreover, on the fiscal side, the European Treaty on the
Stability, Coordination and Governance of the Economic and
Monetary Union (TSCG), known as the "fiscal compact", will be
implemented through the Organic Law on Public Finance Planning
and Governance.

RATIONALE FOR CONTINUED NEGATIVE OUTLOOK

Moody's decision to maintain a negative outlook on France's
government bond rating reflects the weak macroeconomic
environment, and the rating agency's view that the risks to the
implementation of the government's planned reforms remain
substantial. Moreover, Moody's currently also holds negative
outlooks on those Aaa-rated euro area sovereigns whose balance
sheets are expected to bear the main financial burden of support
via the operations of the EFSF, the ESM and the ECB. Apart from
France, these countries comprise Germany (Aaa negative), the
Netherlands (Aaa negative) and Austria (Aaa negative).

Moody's would downgrade France's government debt rating further
in the event of additional material deterioration in the
country's economic prospects or difficulties in implementing
reform. Substantial economic and financial shocks stemming from
the euro area debt crisis would also exert further downward
pressure on France's rating

Given the current negative outlook on France's sovereign rating,
an upgrade is unlikely over the medium term. However, Moody's
would consider changing the outlook on France's sovereign rating
to stable in the event of a successful implementation of economic
reforms and fiscal measures that effectively strengthen the
growth prospects of the French economy and the government's
balance sheet. Upward pressure on France's rating could also
result from a significant improvement in the government's public
finances, accompanied by a reversal in the upward trajectory in
public debt

The principal methodology used in determining France's ratings
was Sovereign Bond Ratings Methodology, published in September
2008. Please see the Credit Policy page on www.moodys.com for a
copy of this methodology.